As 2024 unfolds, Glencore‘s share price has not seen the best start, dropping by 15%.
A significant factor behind this decline is the strength of the US dollar, which surged following a report that the US economy added 353,000 jobs in January—double the expected amount. This economic robustness dampens the likelihood of the Federal Reserve slashing interest rates, thereby bolstering the dollar’s value.
When interest rates remain high or are anticipated to increase, global investors are drawn to dollar-denominated investments for better returns, pushing up the dollar’s demand and value.
As a consequence, commodities, which are priced in dollars, become pricier for those holding other currencies. This dynamic can lead to decreased demand and lower prices for these commodities, affecting companies like Glencore that deal in such goods. The below table shows all of the FTSE 100 mining giants have struggled so far in 2024.
However, Glencore is looking like the ugly duckling of the group, falling further year-to-date (YTD) than all of its counterparts.
FTSE 100 miners
YTD share price performance, as at 13 February
So, let’s dig deeper into the company’s struggles.
Waste not, want not
Glencore is pivoting towards recycling metals and batteries, seeking to become a key player in this growing market. Despite this forward-thinking strategy, the company faces financial challenges, including low profit margins and high debt levels.
Between 2018 and 2022, Glencore reported fluctuating revenues—peaking between $200bn and $250bn annually. That is excluding a dip in 2020 due to the pandemic. However, converting these revenues into profit has been challenging, with gross margins around just 10% in good years. This has left Glencore lagging behind rivals, like Vale and BHP, which have reported higher margins.
The company’s financial strain is further highlighted by its net income variability, including significant gains and losses. With approximately $30bn in debt against $2bn in cash, and maintaining a dividend yield over 8%, Glencore’s financial leverage is high. This financial situation underscores the difficulties in its current balancing act. It’s hard to be a mature, high-dividend company while at the same time taking a punt on starting a long-term, currently unprofitable recycling business.
In response to these challenges, Glencore recently decided to offload its stake in a loss-making nickel mine. This marked a strategic shift to cut losses and concentrate on more lucrative ventures. This decision has been seen as a positive move, signalling the company’s intent to stabilise its financials.
Am I buying?
Glencore’s journey through 2024 has so far been marked by attempts to navigate financial hurdles while capitalising on the growing recycling market.
Despite the current challenges, these efforts could pave the way for long-term success. Recycling might sound wishy-washy, but it avoids the headaches of having to win mining licences. Some metals when recycled can sell for as much as 90% of the price of the newly unearthed stuff.
I won’t be buying Glencore, however.
I’m bullish on the commodities sector, due to the burgeoning demand for metals in green technologies and ongoing industrialisation. For me though, Glencore’s not the vehicle to run that race in, due to its low margins and bloated debt.
Mark Tovey has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024